Toy Story

Charles
Lazarus founded Toys R Us
in 1948.
During the 1980s and 1990s, Toys R Us was the undisputed
top toy retailer in the U.S.
Last
week, the company filed for bankruptcy protection.
How did this happen?
One of the key factors in
failure is inertia. Toys R Us, just
like many leading companies in other industries, simply failed to see the
relentless assault of technology, the transformation from real toys to virtual
toys, and online retailers bent upon rendering traditional retailing redundant.
On top of these, it would also appear that the
leadership suffered from arrogance – we are too big to fail syndrome.
Faced with
ever-mounting problems, the company took the leveraged buyout route to go private in 2005. Private equity firms Bain
Capital and KKR & Co.
lent a huge amount to convert equity into debt. At the time, both Toys R Us and
the buyers made tall claims about making the stores a better place to shop and
work.
Finance
101 says that debt is the cheapest form of capital. It
is not surprising that some leaders and managers believe in this notion and
embrace leveraged buyouts when everything appears to be lost. Even when interest rates may be at historically low
levels, debt has an opportunity cost,
among others.
Thus, the $6.6 billion debt load was too much for the
company. Unable to turn the tide in 12 years, Toys R Us has made a final
attempt to redeem itself by seeking Chapter 11 protection.
It is easy to blame discount
retailers and online retailers for the plight of Toys R Us.
The irony is that toy sales are increasing. Some of the
stores that have reinvented themselves seem to be doing quite well. It is not
enough to store a large variety of toys. What is the shopping experience that
you can create? Can children (and adults) try out how the toys work before
making a purchase? Can sales people be
trained to become specialists and offer meaningful suggestions? Most
importantly, can shopping be fun?
One of the key success
factors for any company is the ability to scan the competitive landscape and initiate proactive measures to place barriers for others. In hindsight,
it was not until 1998 (when Walmart surpassed Toys R Us in toy sales)
that the company seem to wake up. Since then, Toys R us has seen what one
writer calls “management merry-go-round.”
The company has tried six CEOs and two interim CEOs to fix the mess. It is
obvious that none of them had the wherewithal to turn the company around.
Toys
R Us had $444 million in debt due in the current financial year, and a
staggering $2.2 billion in debt maturing in the following year. As one analyst
notes, the company has been in a perpetual refinancing mode.
When
the writing on the wall is clear, companies need to come up with pragmatic,
even if uncomfortable, solutions. As an example, consider
pricing. How did Walmart overtake Toys R Us in toy sales? By discounting
popular toys by over 50% compared to the competition.
Online retailers like Amazon are in
multiple businesses – they are willing to offer lower prices and drive
competition away. The fact that they do not have to invest as much in physical
infrastructure and next-to-nothing in inventory are advantages hard to beat.
A simple metric tells the “toy”
story.
YouGov
BrandIndex measures customers’
perception of a brand every two
weeks.
At
the beginning of 2017, Toys
R Us had a perception index of +12 (on a scale of -100 to +100).
Today
the index is 3.
There are
many who believe the story is not over – that Toys R Us may
still recover.
When
all seems lost, there is always hope.

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